On March 25, 2024, three consumer financial services industry trade groups filed a lawsuit asking the federal district court in Colorado to strike down recent Colorado legislation purporting to opt out of a federal law that allows FDIC-insured state-chartered banks to “export” interest rates on interstate loans to the same extent as their national bank counterparts.  This matter raises issues of first impression with signal importance to state banks and non-bank lenders, and the outcome is likely to have widespread significance well beyond its effect in Colorado.  The complaint filed to initiate National Association of Industrial Bankers, American Financial Services Association, and American FinTech Council v. Philip J. Weiser, Attorney General of the State of Colorado, and Martha Fulford, Administrator of the Colorado Uniform Consumer Credit Code, Civil Action No. 1:24-cv-00812, U.S.D.C. Colorado (“Complaint”) requests that the court declare that the Colorado opt-out, set forth in Colo. Rev. Stat. § 5-13-106, and the Colorado Uniform Consumer Credit Code (“UCCC”), are invalid, violate federal law, and may not be enforced, with respect to loans that are not “made in” Colorado, as defined by federal law.  The Complaint further asks the court to “preliminarily and permanently” enjoin Colorado from taking any action to enforce or give effect to the Colorado UCCC and C.R.S. § 5-13-106 with respect to such loans. 

As discussed in our earlier blogs about Colorado’s opt-out here, here, and here, Congress enacted Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”) to eliminate the competitive disadvantage suffered by state-chartered FDIC-insured banks (“to prevent discrimination against State-chartered insured depository institutions”) with respect to interest rates.  Section 521 gives state-chartered FDIC-insured banks the authority to export interest rates permitted by the respective states where the banks are located.  Binding case law created since DIDMCA’s enactment establishes that such authority is identical to the rate exportation authority enjoyed by national banks.  (Sections 522 and 523 of DIDMCA gave similar rights to state-chartered savings and loan associations and credit unions.)

As the Complaint explains, in Section 525 of DIDMCA, “Congress authorized states to opt out of DIDMCA Section 521—meaning that the opting-out state could continue to impose its own interest-rate caps—but it limited that opt-out right to loans “made in” the opting-out state.”  Accordingly, “In enacting its opt out, Colorado far exceeded the authority Congress granted it under DIDMCA.  Ignoring the federal definition of where a loan is deemed to be “made,” Colorado seeks to impose its state interest-rate caps on any “consumer credit transaction[] in” Colorado.”

The Complaint provides a thoughtful analysis of the meaning of when a loan is “made in” a state, and why that meaning is determined based on federal law:

Federal courts turn to federal law when interpreting federal statutes such as DIDMCA. . . Accordingly, because Section 525 is a federal statute, and Section 525 does not incorporate any state definitions, a uniform federal definition of where a loan is “made” governs DIDMCA opt outs, not Colorado’s chosen definition found in UCCC Section 5-1-201(1). . . Under the plain text, that opt-out right does not look to where a consumer is located; it turns on where the key functions associated with originating (“mak[ing]”) the loan take place. . . Federal banking regulators and courts have long confirmed this approach to determining where a bank is located and makes its loans.  Both the OCC and the FDIC, for example, have consistently explained in related contexts that under federal law a bank is “located” in the state in which it is chartered unless all three “non-ministerial” functions involved in making a loan all physically occur in another state: (1) loan approval; (2) disbursal of loan proceeds; and (3) communication of the credit decision.

By seeking to expand the opt-out right granted under Section 525 to loans not actually “made in” Colorado as defined under federal law, per the Complaint, the Colorado opt-out is invalid on its face, because it is preempted by DIDMCA and violates the Supremacy Clause of the United States Constitution.  Further, the opt-out “violates the Commerce Clause because it will impede the flow of interstate commerce and subject state-chartered banks to inconsistent obligations across different states, creating a significant burden on interstate commerce.”

The Complaint discusses the bases for its assertion that Section 525 permits a state to opt out only as to loans made by banks chartered by that state, including the following detailed information:

The legislative history of DIDMCA confirms that the opt-out was designed to allow states to restore their pre-DIDMCA ability to restrict their own in-state banks from lending above their own state interest-rate limits, without regard for the federal rate.  There is no suggestion in the legislative history of Section 525 that Congress intended to allow states to restrict the interest rates that out-of-state banks physically operating outside a state could charge when lending “into” an opting-out state (the rate exportation issue addressed in Marquette). See, e.g., 125 Cong. Rec. 30655 (1979) (Statements of Sens. Pryor and Bumpers) (explaining the goal of DIDMCA preemption was to rescue state-chartered banks that could not compete within their own states against national banks in a high rate environment); 126 Cong. Rec. 6906-07 (1980) (Statements of Sens. Proxmire and Bumpers) (explaining that the opt out would allow states to nonetheless retain control over their own state banks, and that DIDMCA preemption will allow for competitive equality between state-chartered and nationally-chartered banks); 126 Cong. Rec. 7070-71 (1980) (Statement of Sen. Proxmire) (explaining that “[t]he States retain authority to define the power of State-chartered banks[,]” and DIDMCA meets the needs of the national economy by enabling state banks to make loans in a high interest-rate environment).

The Complaint mentions the history of DIDMCA opt-out, explaining that of eight jurisdictions (seven states, including Colorado, and Puerto Rico) that originally opted out pursuant to Section 525 shortly after enactment of DIDMCA, six subsequently rescinded their opt-outs, including Colorado.  However, Colorado re-enacted its opt-out in 2023, effective July 1, 2024.  As the Complaint explains, while this was characterized as an effort to combat high-cost, small dollar lending, the opt-out actually will harm Colorado consumers by decreasing available sources of credit.

In support of its request that the court enjoin enforcement of Colorado’s opt-out, the Complaint explains that the Plaintiffs’ members as well as Colorado consumers, will suffer irreparable harm if Colorado’s opt-out is enforced as to loans not “made in” Colorado: 

Plaintiffs’ members have already begun to incur both compliance costs and the cost of strained relationships with partners in preparing to comply with the opt out.  And once the law goes into effect, Plaintiffs’ members will (i) lose revenue as a result of lower interest rates and fees; (ii) lose both revenue and goodwill through strained or lost relationships with customers, retailers, and other partners; (iii) lose opportunities for new customer and retailer relationships, including losing customers and retailers to national banks; (iv) incur ongoing compliance costs; and (v) risk consumer lawsuits and enforcement actions… The balance of equities favors injunctive relief against Colorado’s opt out. Colorado consumers—whom Defendants are duty-bound to protect—will suffer harm themselves if the law goes into effect as intended.  Consumers, particularly those at the low end of the credit spectrum, will have reduced access to the responsible, needed consumer credit products offered by Plaintiffs’ members.  These products will likely be offered by far fewer financial institutions if state-chartered institutions can no longer profitably offer them to Coloradans.  Yet national banks will be able to continue to charge the same rates for these same products.  Under Colorado’s new regime, state-chartered banks will simply be unable to compete with them effectively.  With reduced competition from state banks, national banks will have less incentive to constrain their rates for these products.

As noted above, this litigation will be highly significant to, and will be closely watched by, the consumer financial services industry, particularly in light of several other state opt-out bills recently introduced and currently pending, as discussed here and here